Press release

1 Mar 2023

Year-on-year fall in house prices marks a new milestone – EY ITEM Club comments

Martin Beck, Chief Economic Advisor to the EY ITEM Club, reacts to the latest Nationwide House Price Index.

Related topics Growth
  • Nationwide’s measure of house prices saw another month-on-month decline in February, which pushed annual growth into negative territory for the first time since June 2020. Meanwhile, a 1.1% year-on-year fall was the most substantial decline since November 2012. The EY ITEM Club thinks house prices are likely to continue falling for the foreseeable future. 

  • Although mortgage rates have come down in the last few months, they’re still much higher than a year ago. Households’ ability to take on and service debt is being squeezed by falling real incomes and widespread predictions of a further decline in property values will likely encourage some potential buyers to delay purchasing, weighing on demand.   

  • On the other hand, changes in the structure of the housing and mortgage markets and the prospect of a relatively modest rise in unemployment will likely reduce the risk of forced selling. An improving economic outlook later this year could also inject some life back into the housing market. However, the EY ITEM Club still expects average property prices to fall by around 10% to 15% from peak to trough. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “Nationwide’s measure of house prices in February showed no let-up in what has been a sustained decline. Prices fell 0.5% month-on-month, the fifth consecutive monthly decline. This left values 3.7% down on their peak last summer. February’s fall pushed annual growth into negative territory – a 1.1% year-on-year decline was the first since June 2020 and the biggest fall since November 2012.  

“The EY ITEM Club thinks the fall in property prices still has some way to run. Although mortgage rates have dipped from post-mini-Budget peaks, they’re still close to their highest in a decade. For example, the average quoted rate for a two-year fix at 90% loan-to-value was 5.72% in January, almost 400bps higher than at the start of the year. Meanwhile, households’ ability to service debts is being squeezed by falling real incomes. The decline in property values is also likely to encourage some potential buyers expecting further falls to wait before purchasing, weighing on demand and potentially making expectations of price falls self-fulfilling.  

“However, the EY ITEM Club still thinks a serious correction in prices will likely be avoided. Fewer home-owners are exposed to higher mortgage rates and the share of households who own their home outright has risen, standing at 34.8% in 2021-22, up from 30.3% in 2005. Over the same period, the proportion of households with a mortgage fell to 29.5% from 40.3%. The dominance of fixed-rate mortgages also means it will take time for higher borrowing costs to affect mortgagees’ outgoings. Bank of England data suggest that while half of mortgagees, or just over 4mn households, will face higher interest rates this year, half will not see their debt servicing costs rise until 2024 or later.

“Meanwhile, the EY ITEM Club thinks unemployment will see only a modest rise, reducing the risk of a serious decline in prices. With job vacancies still high and surveys suggesting a shortage of workers in some sectors, employers may choose to keep, rather than shed, labour during the downturn. Greater forbearance by lenders, such as switching mortgage holders to interest-only deals, may also reduce the prevalence of forced selling. Moreover, the economy should see momentum return from the second half of this year, as inflation falls back quickly, potentially boosting sentiment in the housing market. Still, the EY ITEM Club thinks average property prices will fall by around 10% to 15% peak-to-trough.”